Above 5%: France’s 10-year bond yield rises, fuelling credit crisis fears

• Above 5%: France’s 10-year OAT yield reaches levels last seen in 2002.
• Government bonds are plunging as investors doubt the French government can secure approval for any substantial savings programme.
• 160 basis points: The spread over the German Bund widens, fuelling credit crisis concerns.

France’s 10-year Obligation Assimilable du Trésor (OAT) yield has risen above 5% for the first time since 2002. Surging debt and increasingly uncontrolled social unrest have combined to create a perfect storm in the bond market. Investors doubt the French government can put forward a credible savings plan, intensifying concerns that a credit crisis could halt the Euro’s recent recovery.

At EUR 3.596 trillion in the second quarter of the year, France’s government debt stood at 119% of GDP, its highest level since the postwar period. The fragile government lacks sufficient parliamentary backing to pass any substantial savings programme.

Support for measures to bring public finances under control is unlikely to come from either main opposition party: Lepen’s far right or Melenchon’s far left. Both are biding their time, hoping to turn the government’s unpopularity into victory in next year’s elections.

Nationwide riots add to pressure on the government

Compounding the government’s difficulties, student protests that began a few weeks ago have spread nationwide. Violent riots last weekend prompted the authorities to introduce partial curfews in several cities this week.

With protests expected to resume on Saturday, French President Emmanuel Macron said on Wednesday that he is meeting intelligence services.

The yield gap between France’s 10-year OAT and the German Bund, regarded as the safer asset, has widened to 160 basis points against this backdrop. This market gauge of France’s risk premium is now at its highest since the 2009-2011 financial crisis.